Overtime Tax Deduction: Calculating Qualified Overtime With isolved

Keeping track of new regulatory and legislative changes can be difficult, especially for business owners. Not only do you need to ensure your business is compliant with any current rules and regulations, but you also need to make sure you’re making any changes necessary to make your business compliant with any new legislation or changes in regulations. The passage of the “One Big Beautiful Bill Act” on July 4, 2025, introduced several different changes, including some that have impacted businesses. Understanding these changes, including things like overtime and tips tax deductions, is crucial for businesses to maintain compliance and helps ensure your employees are getting the most out of their tax return come tax season.

In this article, we’ll break down how employers can better track qualifying overtime hours with isolved. We’ll first start by outlining some of the general requirements regarding the overtime tax deduction, including eligibility and what employers are required to do regarding the deduction. Then, we’ll go over how employers can either utilize the isolved time import spreadsheet or manual time entry to track qualifying overtime hours.

In this article, you will learn:

• OBBBA Overtime Tax Deduction Breakdown

• Tracking Estimated Overtime With isolved

OBBBA Overtime Tax Deduction Breakdown

First, before we get into the specifics of using isolved to better track qualifying overtime, we’ll briefly cover what businesses need to know about the overtime tax deduction.

Overtime Tax Deduction Overview

The “One Big Beautiful Bill Act” introduced several changes relevant to businesses, including new tax deductions on qualifying tips and overtime. For the overtime tax deduction, individuals are eligible to deduct taxes from qualifying overtime hours. Qualifying overtime compensation is defined by the IRS as any compensation paid exceeding the regular rate at which an employee is paid.

For example, if an employee earns time-and-a-half for overtime, they are eligible to have taxes deducted from the half portion (as the regular wage amount earned during overtime does not exceed their regular compensation).

The deduction also does not include any overtime paid in excess of the time-and-a-half requirement outlined by the Fair Labor Standards Act (FLSA), meaning employees earning double their regular wage in overtime are only eligible to deduct taxes from the half portion of their overtime earnings.

Overtime Tax Deduction Requirements for Employers

Employers should take note of a few things regarding the overtime tax deduction, including:

• Only FLSA-covered employees are eligible to claim the deduction.
• For tax year 2025, employers are not required to report qualifying overtime earnings to employees. Employers will be required to do so starting in 2026, however.
• The U.S. Office of Personnel Management has a breakdown on how to calculate FLSA overtime pay.
• This IRS fact sheet provides additional information regarding the overtime tax deduction.

While employers are not required to provide employees with a report on any qualifying overtime earnings, employers should still be prepared for employees seeking guidance on how much qualifying overtime they earned this past year.

Tracking Estimated Overtime With isolved

Employers can use isolved when processing payroll to better track any qualifying overtime hours, making it easier for employees to claim the deduction and helping employers prepare for when reporting qualifying overtime becomes required.

Employers using isolved time tracking will have hours automatically allocated to the corresponding weeks (e.g., Week 1, Week 2). For those using Swipeclock for timekeeping, a new export file format, "iSolved7week," is now available. This format exports data by week in a version that is ready to import directly into isolved.

For employers who manually key payroll into the time entry grid or use an import sheet, please see the video and the steps outlined below to enter payroll hours by week number:

Utilizing the isolved Time Import Spreadsheet

Employers can use isolved’s time import spreadsheet to export time sheet information to then import for payroll processing. To do this, employers should navigate to the “Payroll Processing” tab of isolved, located in the menu on the left-hand side of the page. This will open a drop-down menu under “Payroll Processing”—employers should then click the “Payroll Entry Setup” drop-down and then “Time Entry Options.”

This will bring you to the “Time Entry Options” screen, where you can access the “Create Employee Time Import Spreadsheet” tool. When looking at the time entry options section, your average overtime weeks will be automatically set to match the frequency with which you process your payroll (bi-weekly, semi-monthly, etc.).

Navigating to the time import spreadsheet tool, under time entry template, you’ll want to select “Regular” from the drop-down menu. Then, under rows per employee, select the number of rows that matches your average overtime weeks (for example, if your average overtime weeks is two weeks, you’ll select 2 rows for rows per employee). Then, click the “Create Time Import Spreadsheet” button.

When opening the spreadsheet, you’ll see each employee listed in the number of qualifying rows set when selecting rows per employee. The spreadsheet will provide you with a column for each different earning type that you have selected for that template, as well as the week number associated with that earning.

Employers can then input any overtime hours in the overtime earnings column with the corresponding week number. This spreadsheet can then be imported to use for payroll processing.

Manual Time Sheet Entry

Employers can also track qualifying overtime hours manually with manual time sheet entry. Under the “Payroll Processing” tab in the left-hand menu, click the “Payroll Entry” drop-down. From there, select “Time Entry Grid.” This will open the individual time entry grid for the selected employee.

This grid will include rows for the different earning types, including overtime, as well as columns for the number of hours and week number. Employers should enter the corresponding number of hours under the correct earning type, accompanied by the week number. To add an additional row, press “Ctrl+Insert.” The number of rows within each earning type should correspond to your payroll cycle, similar to the average overtime weeks mentioned above.

Employers with questions on either process should contact their client service representative team for assistance.

Don’t Work Overtime Tracking Overtime Earnings

Keeping track of new pieces of legislation that shift the regulatory field for employers is crucial for maintaining compliance and avoiding costly fees and penalties. Even still, this task is easier said than done. With the passage of the OBBBA and the introduction of new overtime and tips tax deductions, businesses need to ensure they’re keeping up with the changes and taking steps to ensure compliance moving forward.

Whether it’s tracking overtime hours to help your employees take advantage of any tax deductions available to them, or working with an HRIS to improve time tracking accuracy, Payday HCM has you covered. Our years of experience, combined with a knowledgeable staff and capable payroll software, can help your business not only improve daily operational efficiency but also ensure you’re remaining compliant with a field of ever-changing labor laws and regulations. Schedule a meeting with a payroll expert to learn more about how Payday can help your business.